If Australia Stock Exchange had succeeded in replacing its creaky trade-processing infrastructure with a distributed-ledger technology, written in DAML (the code developed by Digital Asset Holdings), it would have transformed Australian finance and set the pace for the rest of the world.
That didn’t happen. As a result, traditional financial institutions – all of which had to invest a lot of money into preparing for a transition that never happened – have pulled in their horns.
Bank stablecoins, blockchains, and investor products have been put on hold. Fintechs catering to these institutions, such as digital-asset custodian Zodia, are still investing in the Australian market but say progress is going to be slow this year.
This has left a gap in the market for regulated crypto. One response is to simply put a wrapper around cryptocurrency. For example, DigFin wrote about Monochrome Asset Management launching licensed bitcoin spot ETFs.
Regulators, alarmed by ASX’s failure to replace Chess, its three-decades old post-trade processing system, have decided to end ASX’s monopoly on clearing and settlement of securities trades. One prospect DigFin covered was that FinClear, an operator of private markets trading that uses distributed-ledger tech, might be able to offer its solution to publicly traded companies, if it can obtain the relevant licenses.
Unregulated
At the same time, however, a fintech startup is looking to take the private-markets idea the other direction: away from regulation and into decentralized finance (DeFi).
That company is Liquidise and it is run by Andrew Ward – a former part of the FinClear team. Ward had a background in digital wealth management, having founded online broker SelfWealth in 2011, which he ran until 2020 (and retains an advisory role).
He stepped back from that business to help FinClear launch its private-markets platform, built with Digital Asset Holdings’ DAML language. That project was initially called PlatformX. In 2022, FinClear bought out Ward’s interest and rebranded it as FCX.
Ward says he still retains a share of FinClear, but from a business perspective, the two have parted ways. However, his experience there informed his decision to launch Liquidise. He saw that FCX’s share registry, built on DLT, underpinning a marketplace was a good idea, and he wanted his own company to do this.
“Having the transfer agency [aka the company managing the registry of companies] led to holding custody of those assets, and control over the process of ownership changes,” Ward said.
But this required a marketplace license, which FinClear is now seeking for FCX. But Ward says other exchanges in Australia, such as Sydney Stock Exchange, struggle to attract liquidity: companies and investors still gravitate to ASX.
Just add DeFi
Ward’s solution to liquidity is to forego a licensed solution and tap DeFi markets. “The concept of Uniswap, liquidity pools, and incentives to get people to contribute to make the market could solve the ‘no investors’ problem, and ensure plenty of liquidity to traditional institutions,” Ward said.
He acquired Boulevard Global, a small share registry for privet companies and renamed it Liquidise. He is positioning it to become a liquidity pool for larger, private companies and their shareholders, mainly wealthy families.
Ward says that by admitting only accredited (not retail) investors using DeFi protcols such as automated market making, tokenization, and atomic settlement, the company doesn’t need a markets license; what it has is a Managed Investment Scheme license for a cash pool that fuels the business, and the registry’s existing know-your-customer system.
Liquidise is trying to create a three-way market.
Companies
First is for the companies. There are 170 private companies on the Liquidise registry. A handful of these are what Australian regulation calls publicly unlisted companies, meaning they have 50 or more shareholders. They are private companies that have some of the burdens of a public one, including the need for independent directors and a published, but they are not founded on shareholder agreements, but by internal rules.
These companies tend to rely on employee share plans to incentize their people (hence the large number of shareholders). Liquidise turns that equity into something liquid for those employees, whenever these companies want to sell shares to raise cash, or participate in M&A. They get paid in Aussie dollars.
Cash pool
The second player in this market is Liquidise’s cash pool.
Liquidise connects to its companies’ accounting software providers, such as Xero, to put that data onto its website. Based on those insights, Liquidise can underwrite those share sales and distribute them to investors on the platform.
It does so by using underlying blockchain tech that tokenizes the shares, but this is an internal operation; neither companies nor investors see it: the trade is tokenized, not the asset.
Investors
The third player are the investors who might acquire these shares. These investors are the same ones who invest in private equity and venture capital funds, including family offices and the investment arms of large corporations.
Ward says Liquidise provides them with some advantages for similar exposures. First, investors aren’t tied up in an illiquid fund. Second, while the share price of a private company doesn’t change, the value of their tokenized representation on Liquidise’s DLT does. This means investors might be able to purchase secondary shares at a discount (or at a premium).
Risks
But investors also face a liquidity risk, that they might not be able to sell these private shares later. Investors could end up owning a portion of these private companies (with capital-gains tax implications).
This can lead to situations where an investor is on both sides of a trade: it can hold private company shares, and if that company decides to sell more on Liquidise, the investor acts as both buyer and seller.
The second challenge is to Liquidise’s cash pool, which acts like an investment bank that takes on the private shares and syndicates them to investors. In theory it should have buyers lined up, but it can also end up stuck with shares, in token form.
The biggest challenge is to turn Liquidise into Ward’s initial vision of a blockchain-based registry with a liquid marketplace on top. That requires growing all three sides of the market: the companies, the investors, and the cash pool. Liquidity is crucial to ensuring the cash pool’s token prices remain in line with the companies’ valuations.
From TradFi to Web3?
Ward says the cash pool will be able to meet A$10 million in monthly turnover by the end of June. That is enough for Liquidise to generate A$1.5 million in fees (generated from the bid/offer spread on shareholder sales), which it splits with investors.
Liquidise is speaking with institutional investors about putting money into the cash pool, including investors from the Middle East. The cash pool doesn’t pay interest; its income comes from transaction fees.
If the model is a success, that could change: the cash pool’s internal token could be transformed into a stablecoin that investors could lend out to DeFi protocols. Ward says first, however, the business has to get established and extend to other illiquid assets, such as alternative-investment funds.
“First we need to get the core business right,” Ward said. “Then we can take Liquidise out of TradFi and into Web3.”
